Where Do Companies Keep Their Cash?

If you have ever looked over a company's balance sheet, you have no doubt noticed the first account under the current asset section is cash and cash equivalents. The cash account contains, as the name suggests, all of the company's cash, while the cash equivalents account represents highly liquid investments the company can convert to cash within a few days. The cash that is listed as such on the company's books will be stored in a bank account, or within an equivalent financial institution, from which the company is then able to pay its liabilities and other expenses.

The company may also keep a small amount of cash in its office for smaller office-related expenses. These small amounts of cash kept on premises for day-to-day use is called petty cash, and would also be recorded in the cash account on the balance sheet.

The cash equivalents that a company may carry on its books are short-term investments that are highly liquid. The cash equivalents are considered to be just like cash simply because they can be quickly liquidated and converted into cash at a fair price within a matter of days.

Other Ways to Stash Cash

A company's cash equivalents account contains any and all short-term investments that are able to be sold at a reasonable price to provide needed cash within a short turnaround time. So, if a company wants to use some of its cash equivalents in order to pay some of its bills, it has the option of selling some of its cash equivalents and using the proceeds to achieve this goal. Examples of cash equivalents include money market accounts and Treasury bills, also called T-bills.

A money market account is very similar to a bank account, but the interest that a company can earn on this account is slightly higher. There may be some restrictions imposed on the firm for using a money market account, such as a maximum number of transactions within the account during a specified period, or even minimum deposit requirements.

Treasury bills can also provide the company with another alternative to keeping cash a regular bank account. T-bills are government debt issues that are sold at periodic intervals. As T-bills can be resold within a public market at any time by the company, they are highly liquid, which allows them to also be classified as cash equivalents. (See also: Introduction toFundamental Analysis.)